To The Moon

$Broadcom(AVGO)$ $Invesco QQQ Trust-ETF(QQQ)$  $DJIA(.DJI)$ $NASDAQ(.IXIC)$  $S&P 500(.SPX)$  

Broadcom Inc. (AVGO) designs, develops, and supplies a range of semiconductor and infrastructure software solutions through two segments: semiconductor solutions and infrastructure software. Its semiconductor solutions segment includes Internet protocol (IP) licensing and provides solutions for managing the movement of data in data center, telecom, enterprise, and embedded networking applications. It also provides a variety of radio frequency (RF) semiconductor devices, wireless connectivity solutions and custom touch controllers for the wireless market. Major end markets include broadband, networking, wireless, storage and industrial. Broadcom derived 66% of its revenues from Asia Pacific, 22% from the Americas, and 12% from Europe in FY21.

Investment Overview

Cementing market leadership through inorganic growth. Broadcom specialises in the design/development of semiconductors in the communications and connectivity segments and operates as an infrastructure software provider. This is enabled through a series of successful mergers, acquisitions, and integrations over the years, e.g., merger between Avago and Broadcom, and acquisitions of CA Technologies and Symantec Enterprise Security. Successful integration of VMWare should further bolster its position in the infrastructure software space. Broadcom differentiates itself through its high-performance design and integration capabilities and focuses on developing products for target markets, with above industry margins.

Market leader with differentiating technological capabilities. We see Broadcom as a key beneficiary of the ongoing AI-boom through its specialty networking/connectivity chips. Management’s expectation for AI contribution of US$10bn revenue in FY24 (or 35% of semiconductor revenue, up from 25%) highlights the growing potential/role that it sees in the networking segment. Better-than-expected showing in the infrastructure software segment also points to a positive start post-VMWare acquisition. Management has guided a US$50bn revenue target for FY24F.

Improving financials underscore right strategic direction. Broadcom's successful integration of its acquisitions are evidenced in its improving financials. The group registered a 10-year CAGR of 28% for revenue and 35% for EBITDA. The shift towards software - with stickier customers and low tendency to switch - has helped to improve margins. Within the semiconductor space, cyclical weakness in broadband and server storage is offset by network’s accelerating AI-driven growth. Moreover, Broadcom's track record of generating consistent free cash flows, and paying stable dividends to its shareholders, are also strong differentiating factors vs peers.

Risk that future acquisitions may not bring the desired value or synergies. Broadcom, as one of the most levered firms in the industry, may also be more susceptible to higher costs of financing as interest rates rise. Slowdown in AI growth momentum.

Broadcom’s strategy may also be complicated by (i) added scrutiny placed by antitrust regulators on forthcoming mergers, and (ii) more expensive costs of financing as interest rates rise. It is also susceptible to the heightened US-China tensions, with 36% and 19% of revenues derived from China and the US in FY21. With a net debt to equity ratio of 1.1x, Broadcom is one of the most levered firms in the industry. Slowdown in AI growth momentum.

Robust revenue and mid-teens earnings growth in FY24/25F is underpinned by 1) recovery in the wider semiconductor industry/value chain, 2) pickup in AI-related spending, 3) accretion from VMWare acquisition. We are watching for signs of successful integration of VMWare and ensuing synergies for this stock. A lacklustre result and/or forward guidance that suggests slowdown in AI momentum is a key risk to watch.

@MillionaireTiger @Daily_Discussion @TigerEvents @TigerStars 

DYODD